It took just over nine months for Article 50 to be triggered following the shock results of the Brexit referendum. Now that Sir Tim Barrow, Britain’s ambassador to the EU, has delivered the letter to Brussels, Emma Herrod investigates what this means for retailers and whether they are ready for the negotiations ahead.
Wednesday 29 March marked the official start of the UK’s departure from the EU. As Article 50 was triggered there was less outward pouring of sadness or celebratory glee than had been seen on the day following the referendum on 23 June. As Europe’s newspapers waved goodbye to the UK, 120,000 EU nationals continued their work in Britain’s retail industry and it was business as usual for those trading online.
In fact, the main impact on retail of Brexit so far has been an increase in international and cross-border sales from UK websites to shoppers overseas. An increase in sales was seen almost immediately as the value of the pound sunk making the price of goods in the UK more attractive. Almost a third of UK retailers that sell internationally have seen an increase in online orders from outside the UK since the EU referendum, according to a survey by Global-e.
However, the same survey discovered that over two-thirds (68%) of retailers have yet to start planning for Brexit, despite more than half (51%) saying that the vote to leave the EU has already impacted UK sales; a fifth (21%) have seen sales increase in the UK, while 30% have seen sales fall.
Half (51%) of retailers that sell internationally expect the UK’s departure from the EU to make cross-border ecommerce more complex. However, 44% of the retailers who are currently selling to shoppers internationally stated that they are continuing with their existing international operations and 23% are planning to invest more in growing their business outside the UK.
“It is crucial that retailers take steps to prepare their operations now to tackle the complexities that may be incurred once Britain leaves the EU,” says Nir Debbi, co-founder and CMO at Global-e.
“Long term, cross-border ecommerce will be the key to success of retailing in the UK, therefore long term plans should be devised to take advantage of rapid growth in this area. With the right preparation, technology and processes in place, as well as a localised shopping experience for the end customer, retailers can continue to see sales grow and conversion rates improve overseas.”
This positive outlook on international trade continues the internationalisation trends seen in recent years as retailers have expanded through ecommerce into growth markets including Germany, France, the US and China. The level of parcels being sent overseas has continued to rise since the referendum outcome was announced and the value of the pound plummeted, and not just from shoppers in the EU.
Between August and November 2016, the percentage of goods sent to non-EU addresses was higher than those sent from the UK to EU shoppers, explains Andy Mulcahy, Editor, IMRG. He puts this down to a dip in the value of the pound against the dollar making purchases from UK websites more attractive to shoppers in the US.
This situation has now reverted to its usual position of the EU being the largest market for UK online retailers – split 56.3% to EU and 43.7% to non-EU destinations in February 2017. However, the level of sales has remained at a higher than expected level. In January 2017, for example, 32% of orders went to cross-border destinations. In January 2016, the figure was 25% and in the same month in 2015, cross-border accounted for 26%.
Amongst its retailer customers, MetaPack hasn’t seen any substantive increase in parcels going overseas above what is expected from the general growth in internationalisation and cross-border ecommerce. At the moment, the internationalisation trend is a “bigger factor than Brexit,” says Patrick Wall, CEO, MetaPack.
There was high growth in international trade during 2016’s peak trading months of October, November and December and the growth in the number of parcels going overseas continues to increase at twice the rate of the domestic market, he explains. Of the total number of ecommerce parcels, 35% go overseas, according to Wall. Of these, 16-20% are sent to Europe “and a huge amount come the other way,” he says.
With sales from other countries remaining high on UK ecommerce sites retailers are continuing with expansion plans and attracting new customers from abroad. Asos, for example, has opened an office in Paris to strengthen its trading in France while Marks & Spencer, which has retreated from physical retailing in China, is continuing with international plans elsewhere. MatchesFashion has announced that the US will be its biggest market by the end of 2017.
Tom Holt, CEO at Pragma suggests the US offers a real opportunity for retailers and they would be “smart to expedite their entry there”. He continues: “While the US consumer is well disposed towards UK brands, it’s still a tough market, but we feel now is the time to turbo charge ecommerce marketing to grow your presence”.
The value of the pound has not impacted solely on sales. It is having an impact on sourcing and retailers’ supply chains and this is a factor that will continue post-Brexit since many retailers bring stock into the UK from Europe and from elsewhere.
Currently, one in four retailers have hedged until the second quarter of this year, so they are being impacted by the devaluation of the pound and having to reconsider how they source goods and whether new geographies would be beneficial from a currency and quality perspective.
The original price of goods is starting to have an impact on selling prices but while this has only really been seen in the grocery sector it won’t be too long before retailers in other sectors will either be swallowing price increases or passing them on to consumers as price rises.
“If you haven’t hedged,” says Holt, “you are having to test price increases ahead of your competitors which may be dangerous. It is the right time to invest more in the ‘controllables’. If you need to push price through, make sure you’re underpinning this with great customer service, a good in-store look and feel, as well as an excellent online customer experience. Your customers need to see that price increases are warranted.”
The longer-term impact on the supply chain will be the change in suppliers, trading partnerships and cross-border agreements as retailers have to adapt to the changing economic and regulatory situation. “This is likely to mean more local sourcing and also new sourcing locations as trade and cross border agreements are negotiated,” says Jason Shorrock, VP Retail Strategy EMEA, JDA. “We also expect increased uncertainty and variability in supply in the short and longer term (on time and in full KPIs). From a supply chain point of view, retailers will need to be more agile and have the ability to absorb higher degrees of sourcing variability to avoid having to increase buffer stocks.”
He adds: “There will be greater opportunity to leverage the relatively weaker pound to drive international growth for UK brands. Again the supply chain will have to adapt to the best sourcing and supply chain strategy to service these international sales; this may mean establishing DCs in more local regions to provide the most cost effective and robust fulfilment.”
THE snap election AND overseas trade
Prime Minister Theresa May’s surprise announcement of an election for 8 June is likely to have a positive impact on EU and international exports, whoever wins the election. “Uncertainty is the most difficult problem facing UK exporters. Whatever the result, we are likely to get a clearer idea of how Brexit will develop; and that’s better for British business,” says David Jinks, Head of Consumer Research, ParcelHero.
“If the Conservatives bold call succeeds, it will strengthen their hands in the forthcoming negotiations. It is encouraging for EU trade talks that Theresa May emphasised our ‘deep and special partnership’ with the EU,” he says.
Additionally, he welcomed her statement that the UK would be ‘free to strike trade deals with old friends and new partners all around the world.
Conversely, a win for opposition parties or an alliance could enable the revisiting of the Brexit debate. While a re-run of the entire Referendum is unlikely, there may well be a greater emphasis on a soft Brexit: with compromises on immigration and other issues in order to ensure Britain remains part of the Single Market. This would eliminate exporters concerns over the impact of potential duties and taxes, not to mention long delays, at EU borders, he explains.
“The lack of ability to plan ahead is bad for British business; a snap General Election is likely to resolve many uncertainties facing UK exporters far more swiftly than long negotiations by a Government with a thin majority would have done. Whatever the colour of the party taking control after 8 June, British businesses will win from the snap election.”
MetaPack believes that a de minimis duty threshold is the silver bullet and will start lobbying key parties in Whitehall and Brussels in the summer. While the company realises that it cannot influence international trade agreements, it believes that the implementation of a high tax threshold below which goods do not incur customs duty will enable ecommerce between the UK and Europe to continue, regardless of agreements in other areas.
Wall is suggesting a figure of between €100 and €500 which is much higher than the €22 set as the threshold for items from the US. If a de minimis is set at a low level the cost of collecting the funds from a retailer is above a level which is economical for a government to collect, he explains. He cites the US level for goods sent to the country from the EU which rose to $800 in 2016 as a counterpoint to the increase in online orders and parcels being sent through US customs.
The BRC too believes that for consumers to continue enjoying great quality, choice and value on goods is dependent on a continuation of tariff-free trade on all products traded between the UK and the EU. Helen Dickinson OBE, Chief Executive of the BRC comments: “Whether through reaching a new trading relationship quickly or securing a phased implementation deal, this must be at the heart of plans for a smooth and orderly Brexit.”
She continues: “It’s encouraging that the Government recognises that the UK has a role to play as a champion of free and open trade. Our priority is to make sure the terms of our trade relationship with the EU are right before seeking new deals with other countries. Securing a positive new customs arrangement which enables mutually beneficial opportunities for trade with the EU and the rest of the world, will be crucial to ensuring British shoppers aren’t hit with the costs of unwanted import tariffs at a time when the pound is already weakened. Therefore, ensuring a phased implementation that will maintain a free and open trading environment until a new trade deal can be put in place is essential.”
Overall, the response for now seems to be continue with ecommerce trading and expansion to make the most of opportunities but balance costs with supply chain and raise your voice over de minimis. It might be the silver bullet to ecommerce trading at the end of the decade.